Real Estate in the UK: When will it be the Right Time to Buy?

The Independent had a lot to say about the UK real estate market today. The front cover paints a gloomy picture about the capacity of young people to purchase their own homes, and several further articles speculate about whether people should even want to buy houses at all. Irrespective of their differing points of view, they all contain one common premise: that real estate matters. This is the key to the puzzle of the real estate market in the UK – the time to buy will arrive when people just don’t care one way or the other. My hunch is that this scenario is at least few years away…


Home Ownership – The Ideal:

It is no secret that the UK population is rather fond of housing (to say the least!). As The Independent reported this morning:


The online survey of 8’000 Britons aged 20 to 45 by the polling company Populus, which the Halifax drew on, found that more than three-quarters who do not own property would like to, …


These results are unsurprising. It would seem that home ownership is the ‘ideal’ for the average person in the UK. My hunch is that a great deal of blood, sweat and tears goes into accumulating the deposits for ‘first-time buyer’ mortgages. This passion for the ‘home ownership ideal’ has lead to all kinds of arbitrary social peculiarities – to name just one example; there seems to be a social stigma against middle-aged people who rent property rather than own it.


What are people doing when they get a mortgage to buy a house?


Here on, I often reiterate that taking on debt is like ‘shorting money’. When you short – say -  a stock; you borrow that stock, sell it for money and subsequently buy it back. If the money price of the stock declines, you get to keep the difference between the entry price and the exit price. Whereas if the money price of the stock increases, you are required to pay the difference. When it comes to buying a house with a mortgage; you borrow money, ‘sell it’ for a house, and later ‘buy back’ the money (i.e. pay your mortgage off) with – presumably – the house. If the ‘house price of money’ declines (that is, if the money price of houses increases), you can keep the difference between the entry price and the exit price. Whereas if the ‘house price of money’ increases (that is, the money price of houses falls), you have to pay the difference.


So, buying a house with a mortgage can be likened to taking a ‘short position’ in money against houses. Or, put differently, buying a house with a mortgage is a levered ‘long house/short money’ speculative position.


The Contrarian Market Philosophy & Symmetry in the Financial Markets:

With the above in mind, I think that it’s a good idea to review the core contention of the contrarian market philosophy and the symmetry in financial markets.


The contrarian philosophy says that one should seek to oppose the crowd’s favorite trades at their extremes. The idea is that when people are profoundly geared to a specific course for prices, there usually is favorable asymmetry in opposing their trades. As I explained here, the reason is that the changes in the supply/demand balance can be swift in the opposing direction to the consensus. On the other hand, the changes in the supply/demand balance are likely to be limited in the direction of the herd. For the investor/speculator, this is a golden scenario.


Moreover, consider that the financial markets are ‘merely’ a place where people go to swap things. Although we always denominate our calculations of things in dollars, in fact both “the thing” and the dollars stand as ‘equal’ to one another. Neither things nor money have a higher status in these arrangements.


People Really Care About Housing (i.e. they’re desperate to speculate):

With this in mind, consider that people really care about housing. That is, they’re avidly watching the prices of houses to see where and when they might buy or sell. Even when they conclude that they’ll probably never buy a house, they’re still watching. This is not an environment where people are totally one-sided with respect to UK real estate. This environment is mixed – the real estate bubble smacked the entire world in the face and they’re desperate to catch the next bubble, avoid it, or to – just – call it. A favorable environment will only arrive once the masses are completely indifferent to housing.


Bear Market Bottoms are Characterized by Apathy (and not Despair):

In yesterday’s ‘Story of the Day’ I alluded to a recent FT interview with the ever-insightful Russell Napier. He mentioned something quite interesting about bear market bottoms in that interview. He said that bear market bottoms are characterized by apathy rather than despair. The prevailing sentiment becomes ‘we don’t want to play anymore’ more than anything else. Considering the comments above on the symmetry in financial markets, we should note that this unwillingness to speculate is precisely a love for cash. So, in the same way that there exists asymmetry in avoiding and betting against housing when everyone loves it, there also exists asymmetry in avoiding and betting against cash (against housing) when everyone loves it. Despair about housing contains (at least a modicum of) emotion about houses compared to cash, whereas apathy towards housing represents a passion for cash and a profound irreverence for houses.




The passion for real estate in the UK is still at elevated levels. The time to buy will arrive when a profound apathy towards housing arises. At that time, there will be virtually 0 stories in The Independent about housing woes (or whatever else). If there are any stories, they certainly won’t be plastered all over the front pages.


NOTE: This article has been about what not to do right now. If you’re interested in a generational cycle that does have a bullish outlook (by my perception), I encourage you to read this article about the monetary & social trends in Japan.

See here for our collection of rare historical economic data.

Posted May 31, 2011